British Pound Remains Weak – What Will BoE Offer?
Fundamental Forecast for British Pound: Bearish
- British Pound Rallies Offer Short Opportunities
- British Pound Sinks as Carney Hints at More Easing
- Euro Retains Favor, EUR/USD Above $1.36 Before NFPs
The British Pound was one of the worst performing currencies this past week, only outpacing the lowly Japanese Yen by +1.34%, while losing ground to every other major currency, including the US Dollar, to which it shed -0.68% to close at 1.5693. Coincidentally, this is just above the 61.8% Fibonacci retracement on the June low to January high, which would suggest a greater breakdown could be around to corner should 1.5675 break the coming week. Certainly, given the Sterling’s performance elsewhere – it lost -1.99% to the Euro and -2.73% against the Swiss Franc – there is reason to believe that it is the weakest European currency, and in the event of risk-aversion, it could suffer even further.
Early in the week, the Sterling was lifted by a bought of stronger than expected economic data, offsetting weakness onset by the poor 4Q’12 GDP reading released on January 25. Net Consumer Credit expanded by triple the forecasted rate in December, while December Mortgage Approvals jumped to their highest level since January 12. But the week ended on a sour note after the January PMI Manufacturing print came in at 50.8, below the 51.0 expectation and the revised 51.2 prior figure. Needless to say, there is reason to believe that the British economy remains weak – stagflation is disappearing but tepid growth persists – and with the Euro and the US Dollar seeing firmer footing week after week, the Sterling looks rather weak.
In terms of changes in positioning this week, the CFTC’s COT report showed that net futures positioning among speculators fell to 10,622 for the week ended January 29, from 17,938 in the week prior. With the market still positioned slightly to the upside, there is room for further selling; there’s no reason to believe that the sell-off is over from this perspective.
In terms of data for the coming week, there are several prints as well as the Bank of England Rate Decision that are out which will cause increased volatility among Sterling-based pairs. On Monday, the PMI Construction (JAN) index will show that contraction persisted, but at a slower rate, at 49.2 from 48.7 in December. On Tuesday, the PMI Services (JAN) index will show that contraction persisted as well, and likewise at a slower rate, at 49.5 from 48.9 in December.
Thursday has the highest concentration of event risk, with the Industrial Production (JAN) and Manufacturing Production (JAN) both expected to show improved growth on a monthly-basis, but the yearly rates are still forecast at -2.0% or worse, underscoring longer-term weakness. Also ahead of the BoE on Thursday is Trade Balance (DEC) data, which should show narrower deficits, in part to a weaker British Pound relative to the Euro.
The BoE on Thursday has very little expectations in either direction ahead of this meeting. The Credit Suisse Overnight Index Swaps show a +0.3% chance of a 25-basis point rate hike at the meeting. Accordingly, there are 0.0-bps being priced in over the next 12-months. But with fiscal policy continuing to tighten – Chancellor of the Exchequer George Osborne announced in December that austerity would have to continue for at least one more year – the BoE will likely embrace further easing policies to at least offset fiscal drag. There’s chatter already that policymakers are shifting in this direction. Current Bank of Canada Governor and incoming BoE Governor Mark Carney recently gave a speech that central banks haven’t “maxed out” non-traditional monetary policies with rates held at the zero-bound. While the BoE is unlikely to make any significant moves before Governor Carney takes the reins in July, we still believe that the British Pound’s overtones remain negative for the coming week; our view remains bearish. –CV